Big Four audit tenders benefit from ‘virtuous circle’

A “VIRTUOUS CIRCLE” that exists for the Big Four is hindering the mid-tier’s ability to win FTSE 350 audits, according to the Competition Commission.

The commission, which is investigating competition issues in the market for large-listed audits, found that the Big Four’s ability to point to an extensive international network and audit engagement partners with relevant experience increases their chances of successfully tendering business.

In a working paper outlining an overview of its findings, the commission found that the “circle operates in reverse” for mid-tier firms, and that there is a “risk of prejudice” against non-Big-Four firms from companies which mid-tier firms have the capability to audit.

“Some of [the mid-tier] equally have extensive international networks (albeit with smaller member firms), but cannot point to the same level of experience of auditing large companies,” it said.

FTSE 350 decision-makers tend not to be concerned about price when determining audit provision, as such fees tend not to represent a large proportion of their overall budgets. The commission also found evidence of a perception that price and quality are linked – therefore undermining one route for mid-tier firms to win work – namely low cost provision.

“Equally, management aversion to shared audits means that mid-tier firms cannot demonstrate their capability by initially auditing say, one subsidiary or territory,” the commission said.

Having heard views from companies, investors and non-Big-Four firms that there is insufficient choice in the market, the commission will interview representatives from Deloitte, Ernst & Young, PwC and KPMG over their dominance of the market.

While the Big Four will be called upon to defend their position, the commission has said that it has seen no evidence of a strong link between market concentration and price and quality.